US Economy – So Much For That Big Surge In The Second Half by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 11, 2016
- US Economy Now Looks Like It Will Disappoint Yet Again
- US National Debt Swells By $1.42 Trillion in FY2016
- President Obama’s Weak Legacy Illustrated in One Graphic
- Justice Clarence Thomas Invisible at New African American Museum
A few months ago, there was broad optimism that the US economy would shift into a higher gear in the second half of this year. I never bought into it. Now, forecasters are revising their optimistic estimates downward, as it increasingly looks like the economy will disappoint yet again.
The Treasury Department quietly reported last week that the national debt increased by $1.4 trillion in fiscal year 2016 which ended on September 30, the third largest annual increase in history. The official budget deficit for FY2016 was reported at $588 billion, but the real federal deficit was more than double that.
[drizzle]Finally, the Smithsonian’s much-anticipated new African American History Museum opened in late September to great fanfare, headlined by President Obama, former President George W. Bush and their wives. Sadly, we learned that the new museum has hardly even a mention of Supreme Court Justice Clarence Thomas. This is an outrage!
It’s a lot to cover in one E-Letter, so let’s jump right in.
US Economy Now Looks Like It Will Disappoint Yet Again
For the last several months, I’ve been telling you that most forecasters were convinced the US economy was going to surge in the second half of this year. Most estimates for 3Q GDP growth were north of 3%. As I’ve written, I just haven’t seen the economic data to back that up.
Part of the optimism was due to the fact that the Federal Reserve Bank of Atlanta’s popular GDPNow economic model was forecasting growth of 3.5%-3.6% for the 3Q as recently as the end of August, as you will see below.
You may recall that I repeatedly questioned that forecast simply because the variety of economic reports I watch did not support a big rebound in the second half. I predicted that the Atlanta Fed would have to revise its GDPNow estimate significantly lower. That has now happened. GDPNow has plunged to 2.2%. And I’m not sure the downward revisions are over yet.
The economists at the Atlanta Fed analyze a lot more reports on the economy than I do, but I’m still not sure what they saw earlier this year to make them so bullish on the second half of 2016. We had anemic growth of just 0.8% in the 1Q followed by a recently revised 1.4% in the 2Q, for a disappointing 1.1% rate for the first half. That was even weaker than the post-recession average of around 2%.
Not to worry, most private forecasters assured us, predicting much stronger growth in the 3Q. Now many of the same prognosticators who expected economic activity to accelerate between July and September are now ratcheting those projections right back down.
The New York Federal Reserve Bank, which tracks the economy separately from the Atlanta Fed, just revised its GDP estimate for the second half of this year to less than 2%. They cited lighter than expected consumer spending in August, which they fear could carry through until at least after the election. I agree.
On that note, polls show that Americans view this presidential campaign as the most negative in US history, with potential voters describing both Clinton and Trump as risky choices. The country has faced tough electoral races before, of course, but the current ugliness seems to be casting an unusually dark cloud over the economy.
“Regardless of the outcome of the election, we think the economy is at risk of a soft patch in the coming months as a result of the uncertainty related to the election,” Bank of America Merrill Lynch analysts said in a research report last week, adding that businesses are holding off on spending because of the current political climate.
Beyond the toxic presidential campaign and usual partisan hostilities in Washington, several factors are combining to weigh on economic growth.
First, demand remains muted by historical standards, and a recent decline in the pace of car sales suggests consumer spending may have peaked in the current business cycle.
Second, US companies are in no mood to spend, either. Even excluding the beaten-down energy sector, business spending this year has risen only 2.1%, according to Deutsche Bank.
Third, data from FactSet show that corporate profits are in line to decline for a sixth straight quarter – the first time earnings have retreated for such a long stretch since the research firm started tracking profits in 2008.
Fortunately, not all the news is bad. Unemployment, now at 5.0%, is low historically. Consumer confidence is at its highest level since the recession began in late 2007. In September, the Consumer Confidence Index jumped to 104.1, up from 101.1 in August.
Housing prices are continuing to recover. The Census Bureau reported last month that median household incomes rose 5.2% in 2015, but you may recall that I debunked that number in my September 20 E-Letter. More likely, incomes rose by 2.5-3.0% last year which isn’t bad.
The good news noted above is more likely keeping us out of a recession rather than signaling that the economy is taking off. So let’s call this year’s economic performance what it is: disappointing.
A jump to 3-4% GDP in the second half of this year is just not happening, as I have cautioned often in recent weeks. This remains the weakest recovery since World War II. If Hillary wins and gets her tax increases, the economy will be even slower next year.
National Debt Swells by $1.42 Trillion in FY2016, More Than Expected
The Congressional Budget Office (CBO) reported last week that the federal budget deficit for fiscal year 2016 was a whopping $588 billion, up from $439 billion in FY2015. The CBO projects the deficit to rise to almost $600 billion in FY2017. That is bad enough.
Yet the Treasury Department quietly reported early last week that the national debt exploded by $1.42 trillion in FY2016, which ended on September 30. This was the third largest annual increase in the national debt in history. To learn of this development, one had to go to the TreasuryDirect website and plug in the dates (September 30, 2015 to September 30, 2016) to get to the $1.42 trillion number.
The difference between the CBO’s $588 billion deficit and the $1.42 trillion increase in the national debt is $834 billion. The difference is that the Treasury Department measures ALL federal spending, including “on-budget” and “off-budget” expenditures. Off-budget expenditures include Social Security, the Postal Service, Fannie Mae, Freddie Mac and some smaller items that are not included in the so-called “unified budget.”
Here are the numbers. As of September 30, 2015 the national debt stood at $18.15 trillion. On September 30, 2016 the national debt had risen to $19.57 trillion. That’s an increase of $1.42 trillion for FY2016 – again, the third largest annual increase in US history.
To put that debt increase into perspective, there are just over